There are different rules for the payment of income tax and National Insurance if you work in the construction industry. These rules are called the Construction Industry Scheme (CIS) and they are both specific and strict.
In the construction industry there are two main categories – contractors and sub-contractors (though it is possible for a business to be both a contractor and a subcontractor). A contractor is generally any person, business or public body who pays others for work carried out within the Construction Industry Scheme. A sub-contractor is any person or business which has agreed to carry out construction operations for another person, business or public body which is a contractor.
Before they can get paid subcontractors must hold either a registration card (known as a CIS4) or a Subcontractor’s Tax Certificate (CIS5) and these are given out by the Inland Revenue. Basically, subcontractors who meet certain qualifying conditions get the tax certificates and those who do not get the registration cards. Only a minority of subcontractors will qualify for a Tax Certificate which then entitles them to gross payments.
The vast majority of subcontractors who apply qualify for a registration card. The subcontractor then shows this to the contractor who must legally make deductions from all payments for labour (around 18% at present, but rates do change) and forward the deductions to HM Revenue & Customs. The deductions are then held against account of the final amount of tax and National Insurance owed by the subcontractor.
It is not just the construction industry and building firms that are affected, but also government departments, local authorities and many businesses normally known in the industry as ‘clients’. Private householders and non-construction related businesses spending less than £1million a year on construction work are not contractors and are not covered by the scheme.
How do I get a registration card?
There are no special conditions for holding a registration card (CIS4). Simply get an application form from the Inland Revenue and complete it, making sure to include your national insurance number. Sign and date it and take to any tax office with a recent passport sized photograph and two proofs of identity. One proof of identity needs to show your photograph (e.g. passport or new style driving licence), and the other needs to show your current address (utility bill, bank statement, council tax bill or local authority or housing association rent book). In addition take confirmation of your National Insurance number if it is not pre-printed on your application form. If you cannot produce your National Insurance number or it cannot be confirmed, you will get a temporary registration card (CIS4) which is valid for one year.
How do I get a subcontractors tax certificate?
Only a minority of subcontractors qualify for a tax certificate entitling them to gross payments. To qualify you must pass three tests, the turnover test, the business test and the compliance test.
The turnover test
To meet the turnover test as an individual you must show that for a continuous three year period you have had a net turnover of £30,000 a year or more. (It has to be within the four years period immediately before you apply and of course you have to deduct the cost of any materials used to earn that income). If you have a partnership or company, the net business turnover test is £30,000 or more multiplied by the number of partners or directors. For a husband and wife team, for example, the turnover test figure would be £60,000. An alternative test for partnerships and companies is that the business has an annual net turnover from construction work of £200,000 or more.
All groups will meet the test if they pass the turnover test for two years and on the third year have only 90% of the turnover required. There are other variants so check with HM Revenue & Customs or look at their website for detailed guidance and examples.
The business test
This is simple. You need to be in a business that provides labour to carry out construction work, conduct your business primarily through a bank account and also keep proper business records.
The compliance test
Tax affairs must be kept up-to date during the three years before application. You need to show you have paid all tax, including any PAYE and subcontractor deductions and submitted all tax returns on time.
If you qualify you should receive your certificate within 30 days of application; if not you will automatically be sent a registration card. If you do get a subcontractors tax certificate it will be one of three types either a CIS6, which is the most common type, a CIS5 which is issued to some companies because of their size, complexity or geographical spread, or a CIS5 (Partner) which is again issued to firms which have complex operations or geographical spread. Only the CIS6 show the authorised user’s photograph and signature.
Normally, a CIS6 is sufficient and will entitle the holder to receive payments gross. Holders get a personalised supply of three-part subcontractor’s gross payment vouchers, which need to be completed for each payment made in the tax month. Keep the second copy as a record (the subcontractors copy), pass the first and third copies to the contractor who will then add his taxpayer reference and send one copy on to the tax office.
Remember that tax certificates and registration cards need only be inspected once by the contractor during their validity and you can show a business name in addition to a personal, company or partnership name. Always use the official Inland Revenue vouchers.
The rules are changing and once you are in the system you will be sent details of all changes. Get further information from HMRC website. Employment status is not a matter of choice, so see also separate article on advice for contractors. Are your workers employed or self-employed?
